MISSISSIPPI POWER & LIGHT COMPANY, APPELLANT V. STATE OF
MISSISSIPPI EX REL. EDWIN LLOYD PITTMAN, ATTORNEY GENERAL OF
MISSISSIPPI, AND MISSISSIPPI LEGAL SERVICES COALITION
No. 86-1970
In the Supreme Court of the United States
October Term, 1987
On Appeal From the Supreme Court of Mississippi
Brief For the United States and the Federal Energy Regulatory
Commission as Amici Curiae
TABLE OF CONTENTS
Question presented
Interest of the United States and the Federal Energy
Regulatory Commission
Statement
A. The Middle South system and Grand Gulf Unit No. 1
B. Federal proceedings
C. Mississippi state proceedings
Discussion
Conclusion
QUESTION PRESENTED
Whether Nantahala Power & Light Co. v. Thornburg, No. 86-568 (June
17, 1986), requires a state public utility commission to allow an
electric utility to recover, in retail rates, its share, as determined
by the Federal Energy Regulatory Commission, of the costs of an
electric power generating facility that supplies power to the utility
and sister utilities in three other states.
INTEREST OF THE UNITED STATES AND THE FEDERAL ENERGY REGULATORY
COMMISSION
The Federal Power Act, 16 U.S.C. 791a et seq., gives the Federal
Energy Regulatory Commission (FERC) exclusive regulatory authority
over the sale of electric energy at wholesale in interstate commerce.
FERC is responsible for ensuring that all rates or charges made,
demanded, or received by a public utility for or in connection with
the transmission or sale of electric energy in interstate commerce are
"just and reasonable" (16 U.S.C. 824d(a)). This case was preceeded by
a determination by FERC that the four operating companies in a public
utility holding company system must share the costs of the holding
company's investment in nuclear power, in proportion to their relative
demand for the energy generated by the system as a whole, by
purchasing power from a particular plant in proportions specified by
FERC. The Mississippi Supreme Court held in this case that the
Mississippi state public utility commission may not allow the
Mississippi operating company to raise its retail rates to recover its
FERC-allocated share of the cost of purchasing this power unless the
state commission first determines the "prudency" of that purchase. If
allowed to stand, the Mississippi Supreme Court's decision would
effectively nullify FERC's allocation of power and costs among the
four companies. FERC participated as amicus curiae in Nantahala Power
& Light Co. v. Thornburg, No. 85-568 (June 17, 1986), because the
decision of the state supreme court in that case similarly threatened
to nullify an exercise of FERC's exclusive statutory authority.
STATEMENT
In a FERC administrative proceeding in which the Mississippi Public
Service Commission (MPSC) and the Mississippi Attorney General
participated, FERC allocated the power and costs of a jointly planned
nuclear power plant, Grand Gulf Unit No. 1 (Grand Gulf 1), among the
four wholly owned electric utility subsidiaries of Middle South
Utilities, Inc. (MSU): Mississippi Power & Light Company (MP&L),
which operates in Mississippi and three other utilities that operate
in three other states. FERC concluded that its allocation would
result in a just and reasonable sharing of the costs among the four
companies. In a review proceeding in which MPSC and the Mississippi
Attorney General again participated, the Court of Appeals for the
District of Columbia Circuit affirmed FERC's determination that it had
jurisdiction to determine the proportions in which the four companies
shall bear these costs. In the present case, the Mississippi Supreme
Court ruled that MPSC may not permit MP&L to increase its charges to
retail customers in Mississippi, to reflect the Grand Gulf 1 costs
allocated to MP&L by FERC, "without first determining that the
expenses were prudently incurred" (J.S. App. 2a).
A. The Middle South System And Grand Gulf Unit No. 1
Appellant MP&L is one of four operating electric utility companies
that are wholly-owned subsidiaries of MSU, an integrated public
utility holding company established in 1949 under Title I of the
Public Utility Holding Company Act of 1935, 15 U.S.C. 79 et seq. The
other subsidiary operating companies are Louisiana Power & Light Co.,
Arkansas Power & Light Co., and New Orleans Public Service, Inc. The
four companies operate as a highly integrated power pool. They sell
and exchange electricity at wholesale across state lines, to each
other as well as to outside companies, and they also sell electricity
at retail in separate service areas in four states. All capacity and
energy on the Middle South system is centrally dispatched from the
system's dispatch center at Pine Bluff, Arkansas. J.S. App. 3a-4a;
Middle South Services, Inc., 30 F.E.R.C. paragraph 63,030, at
65,141-65,142 (1985); Middle South Energy, Inc., 26 F.E.R.C.
paragraph 63,044, at 65,095 (1984).
In the late 1960s, the Middle South system sought to meet projected
increases in demand and to diversify its fuel base (principally oil
and gas) by adding coal and nuclear generating units. The Middle
South system initiated the Grand Gulf nuclear power project in the
early 1970s for these purposes. Under the original plan, MP&L would
have been responsible for financing and constructing Grand Gulf 1, and
New Orleans Public Service, Inc. (NOPSI), would have been responsible
for financing and constructing Grand Gulf Unit No. 2 (Grand Gulf 2).
Responsibility for construction of both units soon shifted to MP&L,
however, because of siting problems within NOPSI's jurisdiction. When
it subsequently became apparent that MP&L could not finance the
construction, MSU made a system decision in 1974 to form a generation
subsidiary, Middle South Energy (MSE) (now Systems Energy Resources,
Inc.), to finance the project MSE acquired from MP&L all of its right,
title, and interest in the Grand Gulf project. J.S. App. 118a.
By the late 1970s, it became evident that Grand Gulf's capacity
would not be needed immediately to meet demand, which was lower than
predicted in earlier forecasts. MSU continued to build Grand Gulf 1
on the assumption that the overall cost (fixed plus variable) per
kilowatt hour would be less than that of alternative energy sources.
The investment cost of Grand Gulf, however, continued to increase
dramatically because of regulatory delay, additional construction
requirements, inflation, and increased financing costs. As a result,
although the investment cost of both Grand Gulf units had been
projected to be $1.2 billion, the investment cost of Grand Gulf 1
alone was approximately $3 billion. The investment and other fixed
costs associated with Grand Gulf 1 are substantially higher per
kilowatt than the costs of other power generated by the MSU system
(with the exception of one other nuclear plant). Although fuel costs
are lower for Grand Gulf 1 than for most other system power sources,
the overall cost per kilowatt hour is higher for Grand Gulf 1 than for
other system sources. 30 F.E.R.C. at 65,144-65,145; 26 F.E.R.C. at
65,101-65,103; see J.S. App. 122a. /1/
B. Federal Proceedings
Under Part II of the Federal Power Act, 16 U.S.C. 824 et seq., FERC
has exclusive regulatory authority over the transmission of electric
energy in interstate commerce and the wholesale sale of electric
energy in interstate commerce. FERC is responsible for ensuring that
all rates or charges, made, demanded, or received by any public
utility for or in connection with the transmission or sale of electric
energy in interstate commerce, as well as all rules, regulations,
practices, and contracts affecting those rates or charges, are just
and reasonable (16 U.S.C. 824(a)).
1. Transactions among the operating companies in the Middle South
system have been governed by a series of "System Agreements" that must
be filed with FERC. In 1982, MSU filed with FERC a 1982 System
Agreement, which set forth the terms and conditions for transactions
among the four operating companies (except the sale of power from
Grand Gulf) and a Unit Power Sales Agreement (UPSA), which established
wholesale rates for MSE's sale of power from Grand Gulf 1; the UPSA
obliged Louisiana Power & Light, MP&L, and NOPSI, but not Arkansas
Power & Light, to purchase specified amounts of its capacity and
energy.
Pursuant to 16 U.S.C. 824d(a), FERC assigned the two contracts to
two different administrative law judges to consider whether the
contracts were "just and reasonable," as required by the Federal Power
Act. MPSC and the Mississippi Attorney General participated in both
administrative proceedings.
a. FERC reviewed the initial decisions of the two administrative
law judges, rendered in February 1984 and February 1985, /2/ and
issued its decision in June 1985. Middle South Energy, Inc., 31
F.E.R.C. paragraph 61,305 (J.S. App. 74a-152a), on reh'g, 32 F.E.R.C.
paragraph 61,425 (J.S. App. 154a-195a), aff'd, Mississippi Industries
v. FERC, 808 F.2d 1525 (1987), reh'g granted and vacated in part, No.
85-1611 (D.C. Cir. June 24, 1987) (Orders 1 & 2), petitions for cert.
pending, Nos. 86-1380 & 86-1424. FERC concluded that the 1982 System
Agreement and the UPSA would result in unjust and unreasonable
allocations of costs between the operating companies and "that some
form of equalization of nuclear plant costs is necessary to achieve
just, reasonable, and non-discriminatory rates among the MSU operating
companies" (J.S. App. 122a (footnote omitted)). FERC determined,
moreover, that the 99most equitable allocation" would be for the
operating companies to share in the system's total investment in
nuclear capacity (four units, including Grand Gulf 1) "roughly in
proportion to each company's share of System demand" (id. at 123a
(footnote omitted). On that basis, FERC ordered the following
allocation of Grand Gulf 1 costs and power: Arkansas Power & Light,
36%; Louisiana Power & Light, 14%; MP&L, 33%; and NOPSI, 17%
(ibid.). /3/
FERC's decision rested on two principal factual findings. First,
FERC found that "the Middle South companies constitute a highly
coordinated integrated electric system," which historically has
"roughly equalized" generating costs among the four operating
companies (J.S. App. 104a, 121a). FERC stressed that "this
coordination and integration results in planning, construction, and
operations which are conducted primarily for the system as a whole"
(id. at 104a). FERC specifically found (id. at 115a-120a) that Grand
Gulf had been planned "to meet MP&L's needs, to meet System needs and
to meet the System goal of diversifying fuel mix." Second, FERC found
that Grand Gulf 1 was part of a reasonable system plan to diversify
the fuel base by developing nuclear power to meet anticipated growth
in demand (id. at 115a-126a).
FERC rejected contentions advanced by several parties, including
MP&L, against the proposed allocation and in favor of other
allocations more favorable to their interests. FERC rejected
arguments by MPSC and the Mississippi Attorney General that the
proposed allocation violated the doctrine of equitable estoppel
because it was contrary to representation made by MP&L and MSE to
MPSC, which MPSC relied upon in granting a certificate of public
convenience and necessity to construct Grand Gulf 1 (J.S. App. 90a).
According to FERC, "a State (C)ommission could not reasonably rely on
representations in State proceedings * * * , since (FERC) alone has
jurisdiction over the (allocation issue)" and, in any event, "the
doctrine cannot operate to bind (FERC) since (it) made no
representation in and w(as) not a party to any of the State
certification proceedings" (id. at 103a).
FERC also rejected a proposal of the Mississippi parties that the
power and costs of Grand Gulf 1 be allocated instead under the terms
of the 1973 System Agreement. FERC determined that allocation on that
basis would be "inadequate and discriminatory because it would result
in MP&L avoiding all responsibility for Grand Gulf for approximately
10 years, after which time it would enjoy the benefits of the project
in the less expensive years" (J.S. App. 124a-125a n.19).
b. FERC subsequently clarified its June 1985 decision in the course
of denying several petitions for rehearing (J.S. App. 154a-195a);
FERC took that occasion to reject submissions that it lacked authority
to reallocate the obligation to purchase Grand Gulf power and that
FERC's allocation failed to consider the needs of individual operating
companies (id. at 172a-192a). According to FERC (id. at 184a), when,
as in the Middle South system, the operating companies "approach power
planning on a system-wide basis, whereby the individual companies'
needs are the component parts of the System power plan(,)
(i)mplementation of the System plan * * * requires that the individual
companies' needs be subsumed by the greater interests of the entire
System." For this reason, FERC concluded, no one operating company
could now avoid financial responsibility for Grand Gulf, which they
jointly decided to build, finance, and allocate, as if the one company
were in independent entity free to consider only its own immediate
needs (id. at 157a; see 26 F.E.R.C. at 65,113).
2. On petition for review of FERC's orders, MPSC and the
Mississippi Attorney General and parties from the other three states
challenged FERC's jurisdication to allocate Grand Gulf 1 power and
costs and the allocation FERC made. The Court of Appeals for the
District of Columbia Circuit unanimously affirmed as to FERC's
jurisdiction but ultimately vacated the allocation itself, remanding
to FERC for a fuller explanation. Mississippi Industries v. FERC, 808
F.2d 1525 (1987), reh'g granted and vacated in part, No. 85-1611 (D.C.
Cir. June 24, 1987) (Orders 1 & 2), petitions for cert. pending, Nos.
86-1380 & 86-1424.
a. Relying on this Court's decisions in Nantahala Power & Light Co.
v. Thornburg, No. 85-568 (June 17, 1986), and Pennsylvania Water &
Power Co. v. FPC, 343 U.S. 414, 422-423 (1952), the court of appeals
upheld FERC's authority under the Federal Power Act to allocate the
power and costs of Grand Gulf 1 (808 F.2d at 1539-1543). The court
emphasized that "(a) consistent line of judicial precedent supports
FERC's authority to approve and/or modify the terms of the pooling and
coordination agreements of closely integrated power systems" (id. at
1545) and that Grand Gulf 1 was "built and planned on a profoundly
integrated basis" (id. at 1540).
The court of appeals, like FERC, specifically rejected the various
objections raised by the Mississippi parties -- MPSC, the Mississippi
Attorney General, and Mississippi Legal Services Coalition -- to
FERC's allocation. The court agreed with FERC that there was no merit
to their claim that the doctrine of equitable estoppel -- based on
prior representations by MSU and MP&L to the MPSC -- limited FERC's
reallocation authority (808 F.2d at 1549-1550). The court also
concluded (id. at 1563-1565), with "little difficulty," that FERC had
properly rejected the Mississippi's proposed allocation of the power
and costs of Grand Gulf 1. Finally, the court rejected (id. at 1548)
suggestions that the potential impact of FERC's allocation on retail
rates required its invalidation.
b. The court of appeals initially affirmed, over Judge Bork's
partial dissent, FERC's specific allocation of Grand Gulf capacity and
energy (808 F.2d at 1553-1566); subsequently, however, the court
granted rehearsing and vacated the portion of its judgment concerning
the specific allocation, and the related portions of its opinion. See
Mississippi Industries v. FERC, No. 85-1611 (D.C. Cir. June 24, 1987)
(Order # 2); see 808 F.2d at 1568-1569 (Bork, J., dissenting). In
accordance with Judge Bork's dissent, the court remanded the case to
FERC "for reconsideration of the decision to equalize the capacity
costs of all nuclear plants, and for an explanation of the criteria
used to determine what constitutes 'undue discrimination' and of why
(FERC's) ultimate decision is not unduly discriminatory" (Order # 2).
/4/
C. Mississippi State Proceedings
1. Since Grand Gulf 1 went into service in July 1, 1985, MSE has
billed the four operating companies, including MP&L, on a monthly
basis in accordance with FERC's allocation. MP&L accordingly sought
approval from MPSC to recover its Grand Gulf payments (about $27
million per month) in retail rates. MPSC granted full retail recovery
of those costs but "phased in" the increase over a ten-year period, so
that consumers would pay less than the full amount during an initial
period and gradually pay the difference (plus financing charges) over
a later period. J.S. App. 30a-31a.
2. On appeal by the Mississippi Attorney General, the Mississippi
Supreme Court reversed (J.S. App. 2a-22a). The court ruled that under
Mississippi law (Miss. Code Ann. section 77-2-39 (1972) MPSC "must
review the prudency of an investment such as Grand Gulf before it can
enact rates based on its cost" to "determine whether MP&L, MSE(,) and
MSU acted reasonably when they constructed Grand Gulf 1, in light of
the change in demand for electric power in this state and the sudden
escalation of costs" (J.S. App. 19a-20a).
The state supreme court rejected (J.S. App. 14a-16a) MP&L's claim
that MPSC was required, under Nantahala, to allow it to pass through
the FERC-allocated costs of Grand Gulf in retail rates without
undertaking any independent "prudency" review. According to the state
court (J.S. App. 15a), MPSC would plainly have jurisdiction to
consider "prudency" if MPSC had itself built Grand Gulf, and the court
did not believe that the Supremacy Clause required a different result
just "because Grand Gulf is owned by an out-of-state corporation." The
court argued (ibid. (quoting Nantahala, slip op. 19) (emphasis
omitted)) that Nantahala was not to the contrary because in Nantahala
the Court had assumed "that a particular quantity of power procured by
a utility from a particular source could be deemed unreasonably
excessive if lower-cost power is available elsewhere," but concluded
that no lower-cost alternative was available in the circumstances of
that particular case. The state court found (J.S. App. 15a (emphasis
omitted)) that in this case, unlike Nantahala, "there is no doubt that
Mississippians do not need the power provided by Grand Gulf, and that
lower cost power is available elsewhere (in fact, by plants owned by
MP&L)."
Finally, the state court concluded (J.S. App. 17a-18a) that
preemption was inappropriate because FERC was never presented with,
and never addressed, the question whether it was prudent to complete
Grand Gulf 1 and continue its operation. The court stated (id. at
17a) that FERC had simply assumed that it was appropriate to complete
construction of Grand Gulf 1, the D.C. Circuit had never addressed the
issue in reviewing FERC's decision, and, as a result, the state court
had "yet to see MP&L, MSE(,) or MSU justify putting Grand Gulf on line
at its exorbitant cost to ratepayers." /5/
Justice Robertson dissented (J.S. App. 23a). Relying on this
Court's decision in Nantahala, he concluded that "our decision this
day is in an area wholly preempted by authority granted by the
Congress to (FERC)" (ibid.).
3. On remand, MPSC rescinded (J.S. App. 199a-200a) its September
16, 1985, rate increase and ordered MP&L to submit a plan for
refunding all of its prior recovery of Grand Gulf 1 expenses from the
retail ratepayers. On June 1, 1987, this Court granted a stay of the
Mississippi Supreme Court's judgment conditioned upon MP&L posting a
good and sufficient bond, in manner and amount to be determined by the
Mississippi Supreme Court. On June 23, 1987, this Court granted a
stay of the Mississippi Supreme Court's subsequent order that MP&L
could not recover its Grand Gulf expenses until it had posted the
required bond.
DISCUSSION
The decision of the Mississippi Supreme Court is flatly
inconsistent with this Court's decision in Nantahala. In Nantahala,
this Court affirmed the rule that "a state utility commission setting
retail prices must allow, as reasonable operating expenses, costs
incurred as a result of paying a FERC-determined wholesale price"
(slip. op. 11). "(A) State may not conclude in setting retail rates
that the FERC-approved wholesale rates are unreasonable" (id. at 13).
In the FERC proceedings here, in which MPSC and the Mississippi
Attorney General participated, FERC determined the wholesale price to
be paid by MP&L for power it acquires: FERC ruled that MP&L, which
draws all of its power from a variety of sources within the MSU
system, should purchase 33% of the power of Grand Gulf 1. FERC's
power to impose this obligation and associated costs on MP&L was
squarely affirmed by the D.C. Circuit. The decision below, barring
MP&L from passing the cost of purchasing its share of Grand Gulf 1
power on to its customers and therefore forcing that cost to be paid
instead by its parent, MSU, or its sister utilities in other states,
would, if allowed to stand, effectively nullify a FERC decision in
which the State of Mississippi fully participated.
The Mississippi Supreme Court justified its conclusion on the
ground that no one has authoritatively determined that it was
"prudent" to build Grand Gulf 1 and that Nantahala leaves a state
utility commission free to determine that the quantity of power
procured from a particular sourcre is excessive, because the utility's
needs can be met from less expensive sources, even though the price of
the higher cost power has been approved by FERC and must therefore be
accepted as reasonable. But apart from the fact that the State of
Mississippi issued a certificate of convenience and necessity and
otherwise participated in the decision to build Grand Gulf 1, this
argument is wrong for two reasons. First, the so-called "prudency"
review traverses matters squarely within the exclusive jurisdiction of
FERC. Second, this is a case like Nantahala itself, where all of the
relevant sources of electric power are within the utility system and
the sole question -- one that only FERC can fairly resolve -- is how
the benefits and burdens of those sources should be shared between
affiliated companies doing business in different states.
For these reasons we join appellant in urging further review by
this Court. Because, moreover, the reasoning of the Mississippi court
is plainly inconsistent with this Court's decision in Nantahala, we
too believe that summary reversal would be appropriate.
1. FERC exercised its exclusive jurisdiction under the Federal
Power Act to review the 1982 System Agreement and the UPSA filed by
MSU. FERC determined that the terms of their allocation of Grand Gulf
1 were "unjust, unreasonable, unduly discriminatory (and)
preferential." FERC accordingly exercised its remedial authority under
Section 205 and 206(a) of the Federal Power Act (16 U.S.C. 824d, 824e
(a)) to determine and fix just and reasonable terms by ordering each
of the four operating companies, including MP&L, to purchase an amount
of Grand Gulf 1 power that would result in the companies sharing the
costs of MSU's investment in nuclear generation in proportions based
on their relative demand for energy on the system as a whole. On that
basis, FERC allocated 33% of the power and costs of Grand Gulf 1 to
MP&L. FERC's authority to impose just and reasonable obligations on
the four companies was squarely affirmed by the D.C. Circuit in
Mississippi Industries v. FERC, 808 F.2d at 1539-1543. The
Mississippi parties -- including MPSC, the Mississippi Attorney
General, and Mississippi Legal Services Coalition -- fully
participated both in the FERC proceedings and in the review
proceedings in the D.C. Circuit.
The Mississippi Supreme Court nevertheless concluded that MPSC
could not allow MP&L to pass that FERC-without first making its own
inquiry into whether the cost was prudently incurred. The Mississippi
Supreme Court apparently expects MPSC to consider either (1) whether
Grand Gulf 1 was an imprudent undertaking for the Middle South system
as a whole, so that some or all of its costs should be borne by MSU's
shareholders rather than by the operating companies' ratepayers, or
(2) whether Grand Gulf 1 was imprudent for MP&L in some way that makes
it appropriate for some or all of MP&L's share of the costs to be
borne by the ratepayers of the other utilities in the other states.
(There are no other possible sources of payment of MP&L's share.) But
MPSC has no jurisdiction to consider either question.
First, MPSC has no jurisdiction to decide that Grand Gulf 1 was an
imprudent undertaking for the Middle South system as a whole and that
MSU and its shareholders must therefore bear some or all of its costs.
The question whether MSU and its subsidiary MSE, which owns Grand
Gulf 1, may charge the operating companies the full costs of Grand
Gulf 1 as part of the price of the power that facility supplies to
them is a question of the justness and reasonableness of the terms of
interstate wholesale transactions in electric power, and it is within
the exclusive jurisdiction of FERC. FERC had jurisdiction to consider
the argument that Grand Gulf 1 costs were imprudently incurred and
should not be passed through to operating utilities that are, for this
purpose, its wholesale customers. /6/ FERC determined that the full
costs should be borne by the operating companies in specified
proportions, and "a State may not conclude in setting retail rates
that the FERC-approved wholesale rates are unreasonable. A state must
rather give effect to Congress's desire to give FERC plenary authority
over interstate wholesale rates, and to ensure that the States do not
interfere with this authority." Nantahala, slip op. 13. /7/
Second, MPSC has no jurisdiction to determine that Grand Gulf 1 was
imprudent for MP&L in some way that makes it appropriate for more of
the power and costs to be allocated to the three other utilities and
their ratepayers. The allocation is the exact issue that FERC
decided. FERC specifically rejected (J.S. App. 172a-192a), as did the
D.C. Circuit in reviewing FERC's order (see 808 F.2d at 1547-1550),
the contention that the needs of individual states should dictate an
operating company's just and reasonable share of Grand Gulf 1. The
D.C. Circuit expressly recognized (id. at 1548) that the direct
consequences of FERC's allocation of power and costs to the four
utilities would be corresponding increases in retail rates, and
squarely upheld FERC's authority to bring about that consequence. The
suggestion that an individual state public service commission may now
revisit the allocation outside the federal administrative and judicial
proceedings and, in effect, veto FERC's decision is flatly
contradicted by the congressional decision to provide FERC with
exclusive jurisdiction over these multistate controversies. As
explained by the D.C. Circuit (id. at 1549 (citation and footnote
omitted)), Congress concluded that FERC would be "in the best position
to reach the most equitable result and to act in the public interest,
rather than to be controlled by the necessarily parochial concerns of
the States.'"
2. The Mississippi Supreme Court's attempt to distinguish this case
from Nantahala is unavailing. /8/ In Nantahala, this Court assumed
arguendo "that a particular quantity of power procured by a utility
from a particular source could be deemed unreasonably excessive if
lower-cost power is available elsewhere, even though the higher-cost
power actually purchased is obtained at a FERC-approved, and therefore
reasonable, price" (slip op. 19 (emphasis in original)). In
Nantahala, the Court concluded that no such inquiry could
appropriately be undertaken by the state public utility commission
because "(n)o (other) source of power * * * is said to be available *
* *" (ibid.). In this case, the Mississippi court argues, MPSC may
determine that the quantity of Grand Gulf power procured by MP&L was
excessive. The problem, of course, is that the quantity of power to
be allocated to MP&L is exactly what FERC determined.
This is not a case of the kind envisioned in the arguendo
assumption in Nantahala, where a utility purchases power from an
affiliate at a FERC-approved price while "lower-cost power is
available elsewhere" (slip op. 19 (emphasis added)). Rather, this is
a case like Nantahala itself, where all of the relevant sources of
power, some of which are more expensive than others, are within the
utility system and the sole question -- one that only FERC can fairly
resolve -- is how the benefits and burdens of those sources should be
shared between affiliated companies doing business in different
states. FERC did not simply determine the reasonableness of the price
of power from a particular source. Pursuant to its authority over
wholesale transactions in interstate commerce, FERC determined that
MP&L was obliged to bear the cost of purchasing a specified percentage
of the power of Grand Gulf 1. FERC specifically rejected the
alternative of MP&L's purchasing less or none of that power and
relying instead on lower cost sources, such as the system power pool.
Hence, to paraphrase Nantahala (slip op. 14-15), the Mississippi
court's "assertion that (MP&L) should have obtained (less) of the
(high)-cost, FERC-regulated power than (MP&L) is in fact (obliged) to
claim under FERC's order * * * runs directly counter to FERC's order,
and therefore cannot withstand the pre-emptive force of FERC's
decision." Because MP&L is not free under FERC's order to avoid that
obligation by seeking out a lower-cost source of power, MPSC (and the
Mississippi courts) cannot deem MP&L imprudent for failing to do so.
The Mississippi Supreme Court's mistaken reliance on the arguendo
assumption in Nantahala stems from the court's failure to apprehend
the implications for MPSC's jurisdiction of MP&L's involvement in the
Middle South system. The Mississippi court treated MP&L as though it
were an independent, autonomous company. FERC, however, based its
allocation of financial responsibility on its finding that MP&L and
the three other operating companies are all wholly-owned subsidiaries
of MSU, their operations are highly coordinated and integrated, and
they were all deeply involved in every aspect of the planning of Grand
Gulf, which they intended to serve the system as a whole (J.S. App.
104a, 113a, 181a). FERC found that because of those joint efforts,
the operating companies must be held jointly responsible for Grand
Gulf; contrary to the Mississippi court's assumption, they were not,
FERC found, autonomous companies that could opt out of sharing in the
cost of Grand Gulf based on their own individual needs (id. at
184a-185a). See id. at 181a; 26 F.E.R.C. at 65,110-65,111, 65,113.
In this case therefore, as in Nantahala (slip op. 15), there is no
occasion for a state public utility commission to "substitute its own
conception of what allocation of * * * power would have been * * *
fair" on the ground that the utility should have looked "elsewhere"
for power. In both cases, FERC's allocation necessarily precluded the
option of looking "elsewhere." /9/
3. The D.C. Circuit's recent decision (see pages 8, 9 and note 4,
supra) to vacate FERC's order allocating the costs of Grand Gulf 1 and
remand for further FERC consideration of certain issues does not
diminish the importance or alter the proper outcome of this case.
First, the court of appeals left intact most of its opinion and
judgment, including its affirmance of FERC's exclusive jurisdiction
over the allocation question. The remand requires FERC only to
consider whether its specific allocation among the operating companies
should be in somewhat different proportions; the fact that FERC will
be revisiting the allocation of the costs of Grand Gulf 1 merely
underscores MPSC's lack of jurisdiction to do so.
More important, the FERC allocation remains in effect until
modified by FERC, imposing daily on MP&L costs that must either be
passed on to MP&L's retail customers or "trapped" (see Nantahala, slip
op. 17). The decision of the D.C. Circuit reversed and remanded
FERS's order establishing the allocation, but the filed rate
containing that allocation is still in effect under the filed rate
doctrine until changed by FERC, /10/ and therefore must still be
honored at the retail level under Nantahala. The possibility that
FERC might, on remand, adjust its allocation of Grand Gulf 1 costs in
a way that affects MP&L's share obviously does not justify
disregarding FERC's decision in the interim. /11/ Similarly, any
question of refunds to MP&L for past Grand Gulf payments involves
wholesale rates and hence is beyond the jurisdiction of MPSC. Of
course, should MP&L receive refunds for its Grand Gulf 1 payments at
any stage, MPSC can, as it recognized when it initially granted MP&L
partial rate relief in this case (see J.S. App. 51a), require that
those refunds be passed through to retail ratepayers.
CONCLUSION
Probable jurisdiction should be noted. Summary reversal would be
appropriate.
Respectfully submitted.
CHARLES FRIED
Solicitor General
LOUIS R. COHEN
Deputy Solicitor General
RICHARD J. LAZARUS
Assistant to the Solicitor General
CATHERINE C. COOK
General Counsel
JEROME M. FEIT
Solicitor
JOHN N. ESTES III
Attorney Federal Energy Regulatory Commission
JULY 1987
/1/ Grand Gulf 2 has not commenced operation, and allocation of its
costs is not at issue in this case.
/2/ See Middle South Services, Inc., 30 F.E.R.C. paragraph 63,030
(1985) (1982 System Agreement); Middle South Energy, Inc., 26
F.E.R.C. paragraph 63,044 (1984) (UPSA).
/3/ FERC's allocation of the "capacity" of Grand Gulf 1 includes a
share of its power and its costs (both fixed capacity costs and
variable energy costs).
/4/ On April 3, 1987, the panel had previously denied rehearing and
the court of appeals had granted rehearing en banc to consider the
terms of FERC's allocation (814 F.2d at 773). On June 24, 1987, the
court of appeals issued two separate orders. In the first, the court,
sitting en banc, vacated its prior order setting the case for
rehearing en banc and reinstated the portions of the opinion and
judgment it had earlier vacated. In the second, the panel vacated its
earlier order denying the petitions for rehearing, granted the
petitions, and reversed a portion of its opinion and judgment of
January 6, 1987, concerning FERC's allocation. We have lodged copies
of the two orders with the Clerk.
/5/ The state court also ruled (J.S. App. 21a-22a) that MPSC must
join MSU, the parent holding company, and MSE, the company that owns
Grand Gulf 1, as parties in its review of the prudence of the Sales
Agreement. In support, the court suggested an additional basis for
its broader ruling that MPSC's authority had not been preempted by
federal law. The court concluded that where, as in this case,
agreements between the operating companies, including MP&L, were
"suspect" because of the absence of arms-length bargaining, Nantahala
requires only preemption of a state public utility commission's
evaluation of a 99FERC approved rate( )" (J.S. App. 21a (quoting
Nantahala slip op. 12); Nantahala did not, the court said, eliminate
the state commission's jurisdiction to examine the "prudency" of the
"suspect" agreements (J.S. App. 21a).
/6/ None of the parties, including those from Mississippi, argued
before FERC that the costs of Grand Gulf 1 were not prudently
incurred. FERC found (J.S. App. 115a-126a), moreover, that Grand Gulf
1 was part of a reasonable system plan to diversify the fuel base by
developing nuclear power to meet anticipated growth in demand. FERC
also explicitly affirmed and adopted (id. at 122a, 146a) the findings
and conclusions of its administrative law judge who determined that
MSU's decisions both to begin and to complete construction of Grand
Gulf 1 were prudent (see 26 F.E.R.C. at 65,112-65,113). If FERC had
instead found that those decisions were imprudent, FERC could have
determined that it was not just and reasonable for MSU and MSE to
charge the four operating utilities the full cost of Grand Gulf 1
power. In that circumstance, MSU's shareholders would have had to
absorb those costs. See New England Power Co., 31 F.E.R.C. paragraph
61,047, at 61,084 (1985), aff'd, 800 F.2d 280 (1st Cir. 1986). The
Mississippi parties, however, made no such argument before FERC, FERC
made no such finding, and the state public service commissions have no
jurisdiction with respect to the issue.
/7/ The Mississippi Supreme Court asserted (J.S. App. 17a) that
preemption was not warranted because "(s)everal aspects of prudency
have never been addressed with respect to Grand Gulf, either by state
or federal authorities." But "'(u)nder the filed rate doctrine, (FERC)
alone is empowered to make that judgment (of reasonableness), and
until it has done so, no rate other than the one on file may be
charged.'" Nantahala, slip op. 10 (quoting Arkansas Louisiana Gas Co.
v. Hall, 453 U.S. 571, 581-582 (1981) (brackets in original)).
"'(T)he Supremacy Clause (does) not permit'" a state to "'usurp( ) a
function that Congress has assigned to a federal regulatory body'"
(ibid.).
/8/ We do not believe that FERC's statements (J.S. App. 102a, 180a)
in its federal administrative proceedings that "Nantahala is not
directly on point" and "(t)he facts of Nantahala are clearly
distinguishable from those here" suggest otherwise. Both statements
occurred prior to this Court's decision in Nantahala and each referred
to factual distinctions between these cases that are relevant only to
a subsidiary legal issue and not to the issues in this case.
/9/ The Mississippi court also suggested that MPSC "had the
authority, indeed, the duty, to inquire into the prudency of the()
(UPSA and another FERC-filed system agreement)" because neither
"fall(s) under the category of FERC approved rates" (J.S. App. 21a;
see note 5, supra). The court argued that in the context of purchases
by closely related entities Nantahala endorsed preemption only of
state utility commission review of "'FERC approved rates'" (J.S. App.
21a (quoting Nantahala, slip op. 12)). Nantahala, however, supports
no such limitation on the preemption scope of FERC's allocation
decisions. To the contrary, the Court expressly ruled (slip op. 13
(emphasis in original)) that "the filed rate doctrine is not limited
to 'rates' per see." The statutory touchstone for FERC's jurisdiction
is whether an agreement "affects" interstate wholesale rates (see 16
U.S.C. 824e(a)).
/10/ See System Energy Resources, Inc., 40 F.E.R.C. paragraph
61,078 (1987); see also Burlington Northern, Inc. v. United States,
459 U.S. 131, 141 (1982) ("federal-court authority to reject
Commission rate orders for whatever reason extends to the orders
alone, and not to the rates themselves").
/11/ Nor is there any realistic possibility that the outcome on
remand will moot this case or reduce its importance. The issues to be
considered on remand do not suggest the possibility that FERC will
adopt an allocation under which MP&L's share of Grand Gulf costs is
very small or zero.